0% Interest Rates and Your Retirement

A recent article by Michael Finke, professor and coordinator of the doctoral program in personal financial planning at Texas Tech University, points to a problem we financial planners have been having for the last several years-a problem we might not be able to shed soon. The problem is interest rates, particularly interest rates near zero. The immediate impact of this problem is pretty simple: Money is cheap for borrowers but for savers, particularly retirees, income is hard to find. The portfolios that our grandparents lived on (spending the dividends and interest but never the principal) are portfolios that cannot be built easily today unless you have more money than you really need. Within this problem is the issue of projecting rates of return for financial plans.

First, the problem: Years ago, a study was done that showed most portfolios could withstand a 4% withdrawal rate over a 30-year time horizon without running out of money. Subsequent research backs that up, sometimes with a slightly higher number, and sometimes with a slightly lower number. Inherent in the 4% number is a rate of return that assumes a certain yield off of bonds as well as a certain return from stocks over-and-above a "risk-free rate" that we normally associate with intermediate-term government bonds. So Professor Finke asked another professor, Wade Pfau, to run some numbers on how low-interest-rate assumptions affect retirement projections. Professor Finke points out that the real rate of return on intermediate term bonds from 1926 to 2010 was 2.52%. Using that number, Professors Finke and Pfau estimate that a 4% withdrawal strategy will fail only 6% of the time over a 30-year time horizon.

But if bonds are currently yielding closer to zero, and the "risk-free rate" is near zero, then our assumptions on long-term portfolio returns are all wrong. In this scenario, Professors Finke and Pfau estimate that a 4% withdrawal strategy could potentially fail 34% of the time over a 30-year time horizon. A one-in-three chance of failure is alarming if these numbers hold true for the coming decade.

The solution is not as simple as defining the problem. Part of the solution is to save more or spend less. This is always easier said than done. The closer you are to retirement, the harder it is to make saving more effective; only spending less in retirement will affect your plan enough to make it "work" in many adverse scenarios.

Another solution, and Professor Finke mentions this, is annuitizing part of your assets to lock in both a rate of return as well as a mortality credit. In effect, an insurance company pays the people that live longer the money that should have gone to the people that passed away early. Admittedly, I have been wary of many annuity products in my career because of the higher associated costs. But annuities make sense if the costs can be reduced. Just look at Social Security or your company pension plan as annuitized income streams where the costs are low.

Annuitizing is going to get more media attention going forward because more companies are going to offer early buy-outs of pension plans in order to reduce long-term expenses-just Google the recent news on General Motors and Ford pensions. The question of annuitizing (and by extension, when to take Social Security benefits) is going to become more important, especially if interest rates stay low. Annuitizing might be an interesting answer for some people to make sure they do not run out of money in retirement.

About Jon T. Meyer, CFP®
Jon T. Meyer, CFP® is the President of Boeckermann, Grafstrom & Mayer Wealth Management, LLC, a Minneapolis-based Registered Investment Advisory firm. Jon specializes in working with retirees and individuals nearing retirement to help them create the income they need in retirement by utilizing advanced social security planning, tax planning and investment strategies. For more information visit http://www.bgmwealth.com.


  1. Thanks you so much for the impressive and sensible guide. I will not hesitate to refer the blog to anybody who needs and wants counseling on this subject.

    Timothy Gates

  2. Annuitizing wird, um mehr Aufmerksamkeit der Medien für die Zukunft, weil immer mehr Unternehmen gehen, um früh-Buy-Outs von Pensionsplänen zu bieten, um langfristigen Kosten-just zu reduzieren Google Die letzten Nachrichten über General Motors und Ford Renten. Die Frage annuitizing (und durch Erweiterung, wenn sie Sozialleistungen nehmen) wird immer wichtiger, vor allem, wenn die Zinsen niedrig bleiben. Annuitizing könnte eine interessante Lösung für einige Leute zu machen, dass sie nicht das Geld im Ruhestand sein.ffxi gil kaufen
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